The Reserve Bank of India issued a seemingly routine circular on 4 July on foreign investment norms by foreign entities, a good twenty days before Holcim announced plans to rejig its stake in ACC and Ambuja. Had the Swiss cement maker’s advisors and bankers read RBI’s circular, the deal may not have been announced in the present form. The central bank’s circular clearly states that operating Indian companies owned or controlled by foreign entities cannot use internal accruals to make downstream investments.
However, a holding or an investment company can make the investment in another operational company. The circular says: “Downstream investments through internal accruals are permissible by an Indian company engaged only in activity of investing in the capital of another Indian companies.” In other words, Ambuja, which is foreign controlled (by parent Holcim), cannot use its internal accruals to acquire a stake in Holcim India. All foreign-owned companies seeking to make downstream investments will have to either do so bringing in fresh foreign capital or create new core investment companies, for which the foreign investment promotion board’s permission will be required.
Bankers say that since the Department of Industrial Policy and Promotion (DIPP) had earlier allowed interest accruals to be routed through a holding or holding-cum-operating entity, Holcim has not done anything wrong. However, RBI’s circular appears to have a view that is different from DIPP’s. Bankers did not take RBI’s circular seriously as it was not expected to at variance with the DIPP. After RBI’s circular, either the government or RBI will have to clarify the matter.
This kind of confusion is the key malaise of Indian policy-making, mergers and acquisition experts complain. Norms on foreign direct investment are either long-term or tactical in nature. RBI’s July 4 circular is being interpreted as a tactical move, as India is in dire need of capital flows. So if companies like Holcim have to increase stakes in their subsidiaries or make new investments, they will have to bring in fresh capital from outside or create new investment companies. This leaves little option for Holcim.
Interestingly, foreign-owned companies cannot even raise debt to acquire capital in another operating company. If a step-down subsidiary of a foreign company wants to acquire operating interest in another operating company, it has to be through an investment company or through fresh foreign investment. There would be exceptions for subsidiaries which are 100 per cent owned and controlled by foreign entities. Most investment bankers say that it looks highly unlikely that the Holcim deal will go through.